Why Agencies Need to Improve Key Metric Measurements in Today’s Economically Challenging Times

Agency executives can greatly increase the success of their organizations if they know how many customers they have. That sounds fundamental. However, I find that most agencies do not have solid counts. They think they do, but they do not.

Similarly, knowing your retention rate would benefit the agency because slight changes in retention rates make outsized differences in growth and profit. Most agencies estimate retention but virtually 100% of agencies measure retention incorrectly. Insurance companies measure retention incorrectly, too.

Knowing whether an agency is growing its customer base is critical. Otherwise, in a hard market, many people are going to congratulate themselves for growth when the growth is nothing but inflation. Some agency executives think their agencies are growing, when in reality, their customer count is decreasing. Rates are just increasing faster than the customer count is decreasing, but at some inflection point, no matter how much rates increase, there will not be enough customers left to support the agency.

These are basic metrics. More sophisticated measures are virtually worthless if an executive does not get these measures correct. Too much wishful thinking and sloppiness exists now, and agencies’ proclivity to not pay attention to reality will last for a while.

Here are suggestions for those wanting longer term success.

1. Measure the number of accounts you have every year. Then run your historic reports to learn if the historic account counts are different from the original counts. I see this happen often, and the differences are material. The historical counts are wrong as often as they are correct. The reasons vary by agency management platform and agency procedures. Getting these counts correct is vital.

Measure the policy counts, too. Understanding whether clients think highly enough of the agency to move their business to you is obviously critical, far more critical than whether commissions are increasing. Client growth is core to whether an insurance distributor is achieving real organic growth rather than faux organic growth.

As more carriers move toward contingency plans focused on policies in force (PIF) counts, knowing whether the carriers are counting policies correctly is in an agency’s best interest. I, for one, would always want to reconcile their counts with my own reports carrier by carrier.

2. Measure retention correctly. When humans were still using stone tablets, retention was difficult to measure. Now, if an agency (or carrier) is inputting data correctly and in a timely fashion, retention should be easy to measure. Run a report of all of your clients as of January 1. Then run a report of the clients that have been with the agency for at least one year as of December 31. That is your retention.

Do be careful how rewrites are handled. Rewrites can distort new business figures and retention numbers.

3. Measure whether your accounts are getting larger or smaller. If you do not have accurate account and policy counts, measuring precisely what is happening to your account size is impossible. The goal, especially in a hard market, is to see average commission per account increase. Measure it by premium, too. If accounts are getting smaller, there is almost certainly something going wrong.

One of the factors I am seeing is that commission rates are decreasing ever so slightly, by tenths. The reasons for average commission rates decreasing vary, but the impact is significant. Most agency executives are missing this point because in most cases, carriers are not issuing commission reductions. Somehow and someway, commission rates are decreasing.

Another cause of commission per account decreasing could be a reduction in policies per account (and no one can measure cross-sales if the account and policy counts are not accurate). In tough times, people may not purchase as many policies. Similarly, people may reduce limits and other coverages. If this happens, your E&O exposures are increasing without proper documentation.

If the agency is growing commissions but not client counts, the odds are high your clients will be shopping more in the near future. Getting ahead of this certainty makes considerable sense.

4. Stay on top of late pays. So much knowledge has been lost in agencies since the last hard market. Keep in mind that in most situations, a policy cannot be canceled for nonpayment if the client enters bankruptcy. The agency eats the loss.

Also, an increase in late pays indicates future retention declines. Staying on top of these situations helps prevent bad debt and may help you and your clients who are suffering financial difficulties.

5. Keep extra money in your bank account. Cash is king in tough economic times. Depending on what the economy incurs, as well as your clients, you may need more cash. A good example for some agencies is that lots of premiums will be returned due to audits. You will have to return commissions, and your producers may need their paychecks adjusted for their share of the returned commissions. A good probability is that many producers will not have any money to return so the agency will need to adjust paychecks going forward. Meanwhile though, an agency will need extra cash to cover the difference.

6. Enter SIC/NAIC code data. Knowing what industries your clients are in and being able to run accurate reports is extremely valuable. So much is changing so quickly that the only way to be nimble enough to move with the market, to even get ahead of the market, rather than reacting after the fact, is to have good data.

Most agencies have failed to enter this data into their agency management systems. Therefore, they do not really know how much of their book is affected by shutdowns or booms. They do not know how to plan for the future based on their client base. They cannot use this data to build strategically. Instead, efforts are on a case-by-case basis with no overall strategy. As a result, the agency loses.

These are six simple but essential metrics every single agency should be tracking if the goal is to succeed and protect the agency. The measures take relatively little extra effort, but some extra effort is required.

Accuracy is important. I always get a kick out of the benchmark reports where some agency reports their retention is 95%. When I ask for proof, the answer is always that it is an estimate. They won an estimate contest against all the other agencies estimating their retention.

Real measures are critical to your true success rather than headline success.